AL RAYAN BANK PLC. Annual Report and Financial Statements. Registered number

Transcription

1 AL RAYAN BANK PLC Annual Report and Financial Statements Registered number For the year ended 31 December 2017

2 Contents Chairman s statement 1 Report of the Sharia Supervisory Committee 3 Strategic report 4 Directors report 14 Statement of Directors responsibilities in respect of the strategic report, the Directors' report and the financial statements 17 Independent auditor's report to the members of Al Rayan Bank PLC 18 Statement of comprehensive income 24 Statement of financial position 25 Statement of changes in equity 26 Statement of cash flows Registered number /

3 Chairman s statement A year of progress and profit I am pleased to report that 2017 was another positive year for Islamic banking in the UK, and one of significant progress and increased profit for Al Rayan Bank. Building upon the success of previous years we delivered our highest ever annual profit before tax, continued to introduce additional experience and skills to our workforce and increased customer numbers by an average of 41 new account openings every day. This is thanks to the attractiveness of our product propositions, the loyalty of our customers, the support of our parent, Masraf Al Rayan, the continued guidance and support of the Sharia Supervisory Committee scholars and, of course, our employees. On behalf of the entire Board, I would like to express my sincere thanks to all our stakeholders. The Bank remains committed to a growth strategy implemented in 2014, following the Bank s acquisition by Masraf Al Rayan; to employ the right financial disciplines, to provide the shareholders with a quality of earnings and to build a high credit quality and stable asset book. Our profit before tax for 2017 rose by 15% to 9.45 million (2016: 8.18 million); a growth fuelled by a 26% increase in total assets which reached 1.81 billion in 2017 (2016: 1.43 billion), and a 28% increase in total liabilities which reached 1.68 billion (2016: 1.31 billion). Our Sharia compliant Home Purchase Plans (HPP) have become a preferred method of property financing for a significant number of people, with 74% more people choosing to fund their residential property purchases with Al Rayan Bank in 2017 than in the previous year. We are delighted that, for the first time, a significant proportion of these new customers were from outside of the Muslim faith; we believe that a quarter of all new HPP customers in 2017 were from non-muslim applicants. It has also been a year of continued development for the Bank s Commercial and Premier Banking divisions, both of which have increased their contribution to the Bank s overall performance. Commercial Banking generated its largest ever gross asset sales and income from fees, whilst our Premier Banking branch in Knightsbridge generated 41% of all customer deposits. During the year we also made investments in our infrastructure, opening new Commercial offices in London's West End to make our services more accessible to clients and support the rapidly growing Commercial team. The Bank continued to enhance its IT infrastructure including upgrading the core banking system and making further improvements to the cyber-security framework and international payment processes. Work was also completed on preparing for the transition, in 2018, to IFRS 9 financial instruments. New savings and HPP products were launched cementing our position as the market leader in Sharia compliant retail banking products. The Bank also made its mark on the global financial map when it became the first Islamic bank in UK history to receive a public credit rating from Moody s. Citing Al Rayan Bank s sound asset risk profile, robust capitalisation and sufficient liquid resources as credit strengths, Moody s judged the Bank s Counterparty Risk Assessment to be Aa3 (equivalent AA-). Its Baseline Credit Assessment (BCA) was judged to be A2 (A) with the support of our parent Masraf Al Rayan, and Baa2 (BBB) independently. In addition, significant headway was made in developing our pioneering Sharia compliant structured funding instrument. The Sukuk backed by our HPP product subsequently saw a successful launch in quarter 1, 2018 on the London Stock Exchange. This issue was more than 150% subscribed and raised 250m of diversified funding for the Bank. 1

4 Chairman s statement (continued) Outlook We continue to operate in a competitive market. We do this successfully, but conscious of the fact that we may have to confront some headwinds in 2018 arising from the fragility of the UK economy and the unknown issues associated with the UK s decision to leave the European Union. We will continue to focus on delivering compelling Sharia compliant products for the customers we serve. The Bank s strategic priorities will continue to be concentrated on: Transforming its culture, its technology and its business models Serving its customers brilliantly Growing sustainable profitability and providing targeted returns for its shareholders Lastly, I would like to give my sincere thanks to my Board colleagues, the Executive team and all our employees for their dedication and determination in successfully delivering against the Bank s objectives in We are all committed to maintaining Al Rayan Bank as the largest and one of the most successful Sharia compliant banks in the UK. 28 March 2018 Robert Sharpe Chairman 2

5 Report of the Sharia Supervisory Committee بسم هللا الرحمن الرحيم (In the name of Allah, the Most Gracious, the Most Merciful) To the members of Al Rayan Bank PLC For the period from 1 January 2017 to 31 December 2017 السالم عليكم ورحمة هللا و بركاته The management of Al Rayan Bank PLC is responsible for ensuring that the Bank conducts its business in accordance with the principles of the Sharia. It is the responsibility of the Sharia Supervisory Committee to form an independent opinion, based on the review of the operations, agreements and transactions conducted by the Bank. It is the responsibility of the Bank s management to implement the decisions of the Sharia Supervisory Committee. In compliance with the Terms of Reference of the Bank s Sharia Supervisory Committee, we submit the following report: We have reviewed the documentation relating to the products and transactions entered into by Al Rayan Bank PLC for the period from 1 January 2017 to 31 December According to the management, the audit review conducted by the Head of Sharia Compliance & Product Development (our representative in the Bank) and documents evidencing the facts, the Bank s funds were raised and invested during this period on the basis of agreements approved by us. During this Sharia Compliance Audit Review, which was conducted by our representative in the Bank, we found 1 Sharia compliance audit issue rated as B and 24 Sharia compliance audit issues rated as C 1. All the Sharia compliance audit issues found during this audit review occurred due to either misjudgement or human errors in implementing the Sharia controls by the Bank s staff and did not have any material effects on the Bank s overall compliance with Sharia. All issues found have been fully addressed with the management of the Bank. Thus, the overall Sharia compliance rating of Al Rayan Bank, for the period from 1 January 2017 to 31 December 2017, was Satisfactory. Therefore, based on the Sharia Compliance Audit Report of our representative and representations received from the management, in our opinion, the transactions and the products entered into or offered by the Bank during the period from 1 January 2017 to 31 December 2017 were in compliance with the rules and principles of Sharia and fulfil the specific directives, rulings and guidelines issued by us. However, we note that there is a room for improvement, based on the findings of the Sharia Compliance Audit Report, in implementing the Sharia controls and minimising any potential errors. The Bank does not pay zakat on behalf of its shareholders and it is the sole responsibility of the individual shareholders to make their zakat payments. We ask Allah the Almighty to grant us all the success and straightforwardness. و السالم عليكم ورحمة هللا و بركاته Dr. Abdul Sattar Abu Ghuddah 28 March 2018 Chairman of the Sharia Supervisory Committee 1 Definition of Sharia compliance audit issue ratings: A B C These represent the highest level of significance, in relation to Sharia requirements and controls, and generally pose material risk to the Bank if not resolved in a timely manner Pose less risk but could have an adverse impact on the Bank s compliance with Sharia if the underlying issues are not properly addressed Opportunities to enhance the existing control environment to ensure continued compliance with Sharia requirements and the SSC guidelines 3

6 Strategic report About Al Rayan Bank PLC Al Rayan Bank PLC (the Bank or the Company ) is a subsidiary of Al Rayan UK Limited, a majority owned subsidiary of Masraf Al Rayan Q.P.S.C (MAR), one of Qatar s most well established and largest banks. MAR acquired the Bank in January As part of the MAR Group of companies, the Bank has a long-term commitment to Islamic finance, with the credibility and stability to deliver for its customers and shareholders. The Bank s brand strategy is rooted in aspirational and responsible banking, with a strong emphasis on customer experience and service. The Bank offers consumers of all faiths a different approach to banking: Banking you can believe in Al Rayan Bank PLC is a UK registered bank, and since 2004 has remained the UK s largest wholly Sharia compliant retail bank. It offers an extensive range of banking services and the largest number of Islamic retail financial products in the UK. The Bank is authorised by the Prudential Regulatory Authority (PRA) and regulated by the PRA and the Financial Conduct Authority (FCA). Current products include Home Purchase Plans (HPP), Commercial Property Finance (CPF), current accounts and a range of savings accounts catering for different needs. The Bank has also introduced Sharia compliant business banking to the UK and offers a wide range of institutional and business banking products and services. The Bank is controlled by an independent Board of Directors and the responsibility for its day to day management has been entrusted to the Chief Executive Officer, Sultan Choudhury. Vision and Values The Bank s vision and values guide its decision making process, and approach to its customers, performance and growth. Vision Values To be the UK s first choice ethical, Sharia compliant bank Sharia Compliant Pioneering Dedicated Aspirational Dependable Everything we do will be in line with our values. Following the Sharia, we will conduct our activity in a fair, ethical and socially responsible manner We will be a dynamic, inspiring and pioneering organisation, which offers unique solutions to our customers We will build strong, enduring relationships, delivering an experience that delights our customers We will be professional and will fulfil our promises, delivering high quality products and services As part of the Masraf Al Rayan Group of companies, we have a long-term commitment to Islamic finance, with the credibility and stability to deliver for our customers The Bank is realising its vision through a deep understanding of its customers and by creating appropriate products and services which meet their needs. This supports the Bank s objective of maintaining growth with sustained profitability and effective risk management. 4

7 Strategic report (continued) Over the past 13 years the Bank has successfully proven the validity of the concept of a wholly Sharia compliant retail bank in the UK. It has introduced a range of products to the market that have been well received by its customers be they Muslims wanting to bank in accordance with their faith, or non- Muslims, drawn by the Bank s responsible and ethical finance approach and attractive profit rates. The Bank has built a thriving branch and office network throughout the UK, including a Premier branch in Knightsbridge and a dedicated new Commercial office in the heart of London s West End. The Bank prides itself on delivering excellent customer service, be it through one of its direct channels or through intermediaries. Achievements and highlights of the year In 2017 the Bank made history, strengthened its leadership team, completed a number of operational projects and expanded its footprint in the UK. The Bank also focused on strengthening its infrastructure and risk management framework to deliver growth and more efficient profitability going forward. Making History Al Rayan Bank became the first Islamic bank in the UK to receive a public credit rating. Moody s issued the Bank a rating of Aa3 in November 2017 which will allow the Bank access to markets which were previously unavailable to it. Work began towards becoming the first Islamic bank in Western Europe to issue an Asset Backed Sukuk, which was subsequently launched in February The Bank s Chief Executive Officer, Sultan Choudhury, was named an Officer of the Most Excellent Order of the British Empire (OBE) in recognition of his longstanding services to Islamic finance. Leadership Team The Bank welcomed its new Chief Risk Officer, and a new Risk Enhancement Plan has been established. Project Delivery Significant investment was made to strengthen the Bank s operational infrastructure. There were a number of upgrades, notably to the Bank s core banking system and cyber-security framework. Progress was made on regulatory projects such as preparation for IFRS 9 and GDPR. Preparation also began on a number of further regulatory projects. New Offices Al Rayan Bank expanded its footprint in the UK by opening a dedicated Commercial office in Central London to support growth of this business division. 5

8 Strategic report (continued) The financial statements for the year ended 31 December 2017 are shown on pages 24 to 57. The profit before tax for the year is 9.45m (2016: 8.18m). This is an increase of 15% year on year and demonstrates a continuation of the Bank s growth trend. Total operating income grew by 23% over the same period, increasing to 33.66m (2016: 27.26m). Profit after tax was impacted by the Bank now incurring a tax charge in the year of 0.83m. This compares to the prior year where there was a tax credit of 1.31m, due to higher recognition of additional deferred tax asset in The table below summarises key financial metrics: Key Financial Metrics Profit before tax 9.45m 8.18m Profit after tax 8.62m 9.50m Cost to income ratio 72% 70% Return on equity 2 7.3% 6.6% Common equity tier 1 ratio 14.6% 17.1% Liquidity coverage ratio 337% 502% The charts below illustrate year on year growth and analysis of income, assets and costs by type: 3 2 Return on equity is calculated on profit before tax 3 Premier refers to HPP financing made to clients of the Premier branch in Knightsbridge 6

9 Strategic report (continued) The Bank is now generating sustained profitability reflecting the increase in asset levels. The majority of the Bank s recurring income is generated by its financing assets which continue to grow, increasing by 36% for year ended 31 December The Bank s total balance sheet has grown steadily, increasing by 26% in Deposits have also shown sustained growth in line with the increase in financing assets and good progress has been made on launching new deposit products to broaden market reach. 7

10 Strategic report (continued) The Strategic Plan The Bank s strategic intent is to continue to generate sustained profitability through excellent customer service, whilst achieving a lower cost to income ratio. This strategic intent is underpinned by five key imperatives which are fully integrated into the Bank s plans and risk management framework. This enables the Bank to make better, risk-informed, strategic business decisions on a day to day basis. The Strategic Plan serves both as a guide to the Bank s employees on its future development and as a blueprint for its external stakeholders, to inform them about the Bank s work and the strategic priorities it has established for the coming years. The key imperatives are as follows: Capital Efficient Asset Growth Increase Fee Income Lower Cost Diversified Funding Robust Risk Management Capability Drive Service Quality & Efficiency The Bank s strategic focus for the coming years is summarised below: Enhance risk management & manage conduct risk Remain the number one Sharia compliant Bank in Europe Commercial Property Finance (CPF), within risk parameters Steady & controlled asset growth Strategic Focus Deliver the transformation plans outlined in the business plan Establish cutting edge digital banking services Appropriate resource availability in line with planned growth Continue to work with the Government to create a level playing field for Islamic finance in the UK Well-managed Premier banking services & products 8

11 Strategic report (continued) Distribution strategy The Bank aims to provide its customers with a seamless experience through any one of its distribution channels. Branch and office network Other channels Knightsbridge, London Personalised, bespoke premier banking services and a comprehensive range of Sharia compliant retail and commercial financial solutions are provided to High Net Worth (HNW) customers, primarily from the Gulf Cooperation Council (GCC) region Business development managers Field-based BDMs facilitate HPP sales Commercial office, London Specialist Commercial Property Finance team to support the Bank s growing financing portfolio within this business sector Intermediaries Intermediaries provide an efficient and effective route for marketing products including HPP and CPF National branch and office network Provide retail and Small and Medium Enterprise (SME) customers with a counter/cashiering service, and access to the Bank s range of personal and business products Voice A dedicated and highly trained Customer Services team and HPP and deposit sales teams are based at the Bank s operational headquarters in Birmingham Branches Birmingham; Leicester; Manchester; Edgware Road, London; and Whitechapel, London. A counter/cashiering service is provided for customers as well as sales of the Bank s range of personal and SME products Digital Web and online service facilitates account opening, payment transactions and product information Agencies Glasgow; Blackburn; Bradford/Leeds; Birmingham; Luton; Greater London namely Ilford, Wembley and Tooting Post Processing of postal applications is completed at the Bank s operational headquarters Our market and competition The Bank is well positioned to help shape the future of responsible finance in the UK and enjoys distinct competitive advantages. Its parent, MAR, is an established and successful sponsor with the skills, experience and expertise to help the Bank achieve its growth ambitions. Alignment with the MAR brand has enabled the Bank to attract customers from the GCC region and build a compelling proposition for HNW customers. Furthermore, the Bank: is the leading provider of a wide range of Sharia compliant retail products in the UK, and the main provider of Islamic home finance in the country. It is increasing its market share of Sharia compliant financing for GCC and CPF markets. 9

12 Strategic report (continued) provides a credible alternative to traditional banking. Its Islamic finance model is responsible and fair, and its savings products consistently deliver competitive and market-leading rates of return. has established a loyal customer base amongst Muslims and non-muslims alike, demonstrating the popularity of ethical banking across all faiths. possesses a strategically located branch network which has assisted in maximising the Bank s exposure within the UK. employs staff who are dedicated and passionate about working for the Bank, appreciating the culture and environment of a Sharia compliant, ethical organisation. is agile enough to embrace change, whilst delivering steady growth. The Bank undertakes competitor analysis to understand the evolving landscape, and to make informed strategic decisions. It remains well placed to take advantage of growing demand by virtue of its strong foundations, specialist experience built up over a number of years, and range of products and services. Liquidity and funding Liquidity The Bank has a low liquidity risk appetite. One of its key objectives is to ensure that it retains sufficient liquid resources in line with regulatory liquidity requirements. The Bank has developed a plan to ensure that liquidity requirements are effectively managed in light of all applicable regulations and planned asset growth. Funding Retail funding The strategy for funding is underpinned by acquisition of stable funding through retail deposits, which are closely managed with well-priced products catering for the differing requirements of customers. Branches continue to be an important source of stable retail funding. Rates are monitored and managed to attract a longer behavioural weighted average deposit life to match the asset that is being underwritten, thus minimising the risk of maturity transformation. Wholesale funding Wholesale funding to date has predominantly been sourced from prominent GCC counterparties. The Bank continues to diversify its wholesale funding mix and has taken significant steps to achieve this during the year: In November 2017 Moody s issued the Bank an Aa3 rating which will allow the Bank to access funding previously unavailable to it and potentially reduce cost of funding. The set-up of a 250m Asset Backed Sukuk, which was subsequently launched in February 2018, was finalised. Principal risks and uncertainties The Board has responsibility to ensure that appropriate risk management systems and controls exist for the determination, assessment and management of the principal risks facing the Bank and approve the risk appetite for these risks in the context of achieving the Bank s strategic objectives. In line with the above, the Bank has performed an assessment of the principal risks that it faces and their impact on its liquidity, solvency, forward performance and the effective delivery of its operating model and strategy. 10

13 Strategic report (continued) Risk Management Framework The Bank s Risk Management Framework (RMF) and its underlying control systems are the principal tool to identify, monitor and report on the risks to which the Bank is exposed. This provides reasonable assurance against the risk of material misstatement or forward loss. The RMF is aligned to regulatory requirements and is supported by appropriate policies, processes and procedures. These ensure risks are managed appropriately and are proportionate to the size of the Bank and nature of its products. The Bank has grown rapidly in recent years and as it prepares for future growth it has made the strategic decision to embark on a plan to further enhance and mature the existing RMF to align with industry best practice. This initiative will embed scalable functionality and infrastructure to support the business and its sustainability, aligned to its future aspirations. The effectiveness of internal controls is regularly reviewed by the Board and includes reporting from the business lines, risk and audit. Principal risks are the primary risks that the Bank faces which could impact the delivery of its strategy: Principal Risk Operational Risk The risk of direct or outsource loss from the failure of systems, process, people or external events Mitigation Policies and processes aligned to the Bank s structure and operating model Regular risk event and loss escalation, reporting and remediation Monitoring of remediation, change and transition programmes Investment in system infrastructure, technology and digital strategies Compliance & Financial Crime Risk The risk of direct loss or sanctions resultant from the failure to comply with applicable laws, regulations and legislation, including, for example Treating Customers Fairly, Anti-Money Laundering Simple understandable products aligned to core offering Provide strong policies, governance and rigour to the approval of new products and initiatives Maintain and embed policies, processes and controls Ongoing staff awareness, training and assurance mechanisms Regulatory change horizon scanning Credit Risk The risk that customers are unable to honour their financial obligations to the Bank Conservative risk appetite, supporting policy framework with appropriate concentration risk limits Provide products, and in markets, where the Bank has specific expertise Obtain appropriate level of supporting asset cover security Maintain and embed robust policies and guidelines Regularly review performance against risk appetite Perform portfolio stress testing to confirm resilience Sharia & Reputational Risk Failure to meet the expectations of our customers, investors, regulators or other parties Products, policies and behaviours aligned to the ethical code of the Bank Independent Sharia advisory, oversight and challenge Maintain open and honest relationships with regulators and all stakeholders Market Risk The risk of reductions in earnings and/or value, from unfavourable market movements The Bank does not undertake proprietary trading Profit rates and currency obligations are matched where possible and the Bank seeks to minimise market risk in all transactions Basis risk is minimised by matching profit rate reference base for assets and liabilities. 11

14 Strategic report (continued) Principal Risk Prudential Risk The risk of failure from not holding sufficient or appropriate reserves to support growth, regulatory requirements, or to repay obligations when required Mitigation Daily monitoring Adequacy of liquidity buffer and 90 day forward test Robust forecasting and testing of forward capital plan Contingency funding and Risk & Resolution Plan invocation Capital and liquidity sensitivity and stress testing Regulatory Change The regulatory environment continues to evolve and change The industry is now subject to a number of regulatory bodies including but not limited to the Financial Policy Committee, the Bank of England, PRA, FCA The Bank actively monitors regulatory changes, engages with regulators and industry bodies to keep abreast of current development and respond as appropriate Undertake horizon scanning and forward planning to ensure compliance with new regulatory requirements Changes and higher expectations coming out of the regulatory bodies can lead to increased cost of doing business additional capital requirements Outlook for 2018 Economic outlook The UK s decision to leave the EU in 2016 brought about a significant amount of uncertainty and volatility in the markets. This uncertainty continued to cast a shadow on the economy in The economy however proved to be resilient, post the Brexit vote, with economic indicators holding relatively strong. GDP, however, did slow down in 2017 as inflation rose, which consequently saw the base rate increase from 0.25% to 0.50% in November 2017, with further increases forecast in This inevitably will lead to a reduction in household disposable incomes. Overall the full impact of Brexit on the UK economy and the financial services sector is still unknown it is likely that this will only truly be known after the arrangements between the UK and EU are finalised. The UK Government has stated that it is a key priority to ensure that there is an adequate transition period, avoiding a cliff edge both at the moment of withdrawal following the Article 50 process and as the UK and EU move towards a new relationship. The Bank also continually monitors, both independently and together with its parent, potential risks associated with any political and economic uncertainties in the wider GCC region. Presently, there has been no adverse impact to the Bank s business or plans, resulting from events during 2017 in the region. The Bank is regularly engaged in forward-looking stress testing and assessing risks based on both PRA defined stresses and management s own internal severe stress scenarios. It is considered that no additional specific stress tests are required to take account of any Brexit-related risks as the relevant risk drivers that might be impacted by the next stages of Brexit are those that have already been covered under the stress scenarios identified by the Bank s management. Specific stress scenarios are incorporated into the Bank s planning and risk management processes relating to events in the GCC region. 12

15 Strategic report (continued) Business outlook The Bank remains committed to its current strategy. This will be evolved to take account of the changing competitive landscape and operating environment. In 2018 the Bank will steadily grow its financing asset book, building on an increasing range of financing products. This growth will continue to support the Bank s overall objective of increasing profitability in a consistent and controlled manner, whilst improving efficiency and its cost to income ratio. However, 2018 will also be a year of significant investment for the Bank. There will be a focus on investing in the Bank s systems, processes, risk management and people to ensure that it has solid foundations and is prepared for the next phase of the Bank s future development. Therefore, it is considered that the Bank is well positioned to respond to future challenges based on its quality asset book, Board & management focus, dedicated employees and a dynamic approach to managing change associated with the enhancements being made to its operational and risk management infrastructure. Sultan Choudhury Chief Executive Officer Signed on behalf of the Board Al Rayan Bank PLC 44 Hans Crescent Knightsbridge London SW1X 0LZ 28 March

16 Directors report The Directors present their report and financial statements for the year ended 31 December Directors and Directors interests The Directors who held office during the year ended 31 December 2017 are as follows: Robert Sharpe (Chairman) (b) (c) Adel Mohammed Tayeb Mustafawi (b) (c) Sultan Choudhury (c) Ahmed Swaleh Abdisheikh (a) (b) (c) Malcolm Brookes (a) Richard Sommers (c) (a) (b) (c) Denotes member of Audit Committee Denotes member of Remuneration and Nomination Committee Denotes member of Risk, Compliance and Credit Committee Adel Mustafawi and Ahmed Abdisheikh have a current association with Masraf Al Rayan Q.P.S.C and are, therefore, not considered independent. No Director had any interest in the ordinary shares of the Bank in the current or preceding year per the register of Directors interests. Subsequent to 31 December 2017, Robert Sharpe and Sultan Choudhury stepped down as members of the Risk, Compliance and Credit Committee. Additionally, Richard Sommers was appointed as a member of the Audit Committee. Significant shareholders The following shareholders had interests in the ordinary shares of the Bank in excess of 3% as at 31 December 2017: 2017 (%) 2016 (%) Al Rayan (UK) Ltd On 3 February 2014, Al Rayan (UK) Ltd acquired 4,345,789,979 ordinary shares of 0.01 each of the Bank. This represented approximately 95.59% of the existing share capital of the Bank at that time. On 3 February 2014, Al Rayan (UK) Ltd subscribed to an additional allotment of 7,575,400,000 ordinary shares of 0.01 each taking its effective shareholding in the Bank to 98.34%. The remaining 1.66% is owned by minority shareholders. The shareholding in Al Rayan UK Ltd is as follows: MAR 70% (2016: 70%) and Qatar Holding LLC 30% (2016: 30%). Sharia Supervisory Committee members The Sharia Supervisory Committee (SSC) members during the year were as follows: Dr. Abdul Sattar Abu Ghuddah (Chairman) Sheikh Nizam Yaqoobi Mufti Abdul Kadir Barkatullah The report of the Sharia Supervisory Committee is set out on page 3. 14

17 Directors report (continued) Dividends The Directors do not recommend the payment of a dividend for the year ending 31 December 2017 (2016: nil). Political contributions The Bank made no political contributions during the year ending 31 December 2017 (2016: nil). Employees The Bank recognises the importance of effective communication with staff. Communication includes employee feedback and is encouraged through a variety of methods. It is the Bank s policy to ensure that all employees and applicants for employment are afforded equal opportunity in line with UK employment law. Going concern Accounting standards require the Directors to assess the Bank s ability to continue to adopt the going concern basis of accounting. In performing this assessment, the Directors consider all available information about the future, the possible outcomes of events and changes in conditions and the realistically possible responses to such events and conditions that would be available to them, having regard to the Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks published by the Financial Reporting Council in April In order to assess the appropriateness of the going concern basis the Directors considered the Bank s financial position, the cash flow requirements laid out in its forecasts, its access to funding, the assumptions underlying the forecasts and the potential risks affecting them. The Bank has been supported by capital injections from its parent. Further amounts are forecast to be received in 2018 in line with prior agreements. Additionally, however, the Bank is profitable on a sustained basis and generates additional regulatory capital once these profits have been verified. After performing this assessment, the Directors concluded that it was appropriate for the Company to continue to adopt the going concern basis in preparing the Annual Report and Accounts. Financial risk management The Bank s approach to financial risk management is outlined in the strategic report and in Note 29. Subsequent events Events subsequent to 31 December 2017 have been highlighted in Note 30. Future Developments Future developments are outlined in the Chairman s statement. Disclosure of information to the auditor Each of the persons who is a Director at the date of approval of this annual report confirms that: so far as the Director is aware, there is no relevant audit information of which the company s auditor is unaware; and the Director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act

18 Directors report (continued) Auditor During 2017 the Board invited applicants to tender for the Bank s audit. As a result, the Board recommended that Deloitte LLP be appointed as the Bank s auditors. The appointment was confirmed at the Annual General Meeting (AGM) held in April Deloitte LLP have expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming AGM. By the order of the Board Sultan Choudhury Chief Executive Officer Al Rayan Bank PLC 44 Hans Crescent Knightsbridge London SW1X 0LZ 28 March

19 Statement of Directors responsibilities in respect of the strategic report, the Directors report and the financial statements The Directors are responsible for preparing the strategic report, the Directors report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Bank and of the profit or loss of the Bank for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 17

20 INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF AL RAYAN BANK PLC Report on the audit of the financial statements Opinion In our opinion the financial statements: give a true and fair view of the state of the company s affairs as at 31 December 2017 and of its profit for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act We have audited the financial statements of Al Rayan Bank plc (the company ) which comprise: the statement of comprehensive income; the statement of financial position; the statement of changes in equity; the statement of cash flows; and the related notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor s responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC s Ethical Standard were not provided to the company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters Materiality Scoping The key audit matters that we identified in the current year were: Revenue recognition from investment in financing asset under the amortised cost basis; and Impairment of investment in financing assets. The materiality that we used in the current year was 472k which was determined on the basis of 5% of profit before tax. All of the company s activities are based in and audited directly by the audit team from the UK. Conclusions relating to going concern We are required by ISAs (UK) to report in respect of the following matters where: the directors use of the going concern basis of accounting in preparation of the financial statements is not appropriate; or We have nothing to report in respect of these matters. 18

21 the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Revenue recognition from investment in financing asset under the amortised cost basis. Key audit matter description How the scope of our audit responded to the key audit matter Income from financing assets is recognised under the amortised cost basis using the Effective Profit Rate (EPR) approach, in accordance with IAS 39, Financial instruments: Recognition and measurement, where future expected profits, including any fees paid or received, are discounted over the estimated behavioural life of the asset. A detail of the applicable accounting policy and breakdown is disclosed in note 4 on page 32 and note 6 on page 38 of the financial statements respectively. The financing assets portfolio comprises of the investments in Commercial Property Finance (CPF) and Home Purchase Plan (HPP) and has grown significantly in the last few years. The estimated behavioural life of the CPF and HPP assets and the method used to allocate all the directly attributable costs over the behavioural life are areas of significant judgement. These assumptions are sensitive and have a significant impact on revenue recognition. Therefore we consider this as an estimation risk and a potential fraud risk. Our procedures included evaluating the design and implementation of key controls surrounding the estimated behavioural life of the investment in CPF and HPP and allocation of directly attributable costs over the behavioural life. We evaluated the model and the assumptions used in it by analysing the historic behavioural life of the investments made and repayments received in the previous years and also analysed the reasonableness of the behavioural life in comparison to our knowledge of the industry, expected redemption levels and other factors affecting future behaviour. As part of our procedures, we tested the accuracy and completeness of the data used in determining the behavioural life of the investments in CPF and HPP. We have analysed the behavioural life assumption under possible scenarios to assess the impact on income from financing asset balances due to the absence of sufficient historic information. We critically assessed the fees received or paid as part of the EPR model against the prescribed criteria of IAS 39 and tested their inclusion as transaction costs in the EPR model. We reviewed the appropriateness of the disclosure regarding possible changes in the behavioural life assumption. 19

22 Key observations The behavioural life assumption applied in the EPR model is towards the conservative end of an acceptable range and we concluded that the reported revenue figure is appropriate and in line with the requirements as outlined in IAS 39. Impairment of investment in financing assets Key audit matter description A model is used to determine the provision for impairment against the Bank s investment in financing assets i.e. CPF and HPP. Different probabilities of default are used in the model to determine the level of collective provision for impairment. In absence of entity specific historical data of defaults, management and the Credit Committee then consider these probabilities against a lower limit level of provision based on external data. Considering the level of judgement involved, we considered this to be an estimation risk and a potential fraud risk. A description of the accounting policy and the breakdown is mentioned in note 4 on page 33 and note 14 page 42 of the financial statements. How the scope of our audit responded to the key audit matter Key observations Our procedures included evaluating the design and implementation of the control surrounding management s assumption of probabilities of default. We challenged management s assumptions for impairment provisions and external data used in the model with reference to our industry knowledge and factors that may trigger a default event. On a sample basis, we tested the underlying information for completeness and accuracy and checked the formulation of various inputs in the model. We reviewed a sample of performing loans to assess whether any IAS 39 loss indicators were present. We reviewed the appropriateness and presentation of disclosures with relevant accounting standards. We have identified that the impairment provisions recognised by Al Rayan Bank are within, but towards the conservative end, of a reasonable range and are therefore consider that the reported impairment provision are appropriate. Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Materiality 472,000 Basis for determining materiality We determined materiality based on 5% of profit before tax.. 20

23 Rationale for the benchmark applied We considered profit before tax as the most appropriate benchmark as it represents profitability and affects the decision making of the users of the financial statements. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of 23k, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the company and its environment, including controls and assessing the risk of material misstatement. The company s operations are based in the UK and all material balances are audited directly by our UK audit team. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor s report thereon. We have nothing to report in respect of these matters. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. 21

24 Responsibilities of directors As explained more fully in the directors responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at: This description forms part of our auditor s report. Use of our report This report is made solely to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: the information given in the strategic report and the directors report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or We have nothing to report in respect of these matters. 22